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You must give your financial adviser details of any personal health and lifestyle issues

Andrew Tully, from Retirement Advantage

Under FCA proposals, pension companies must show the difference between their quote and any higher rate available on the open market, helping them get a better deal.

Andrew Tully, pensions technical director at Retirement Advantage, warns the FCA has ignored another key issue that everybody must address before signing up to an annuity: “You must give your financial adviser or annuity company details of any personal health and lifestyle issues, as it may help you get more income.”

If you have suffered a serious illness, are on medication, smoke heavily or are seriously overweight, you could get up to 20 per cent more income from something called an enhanced annuity, Tully says: “This pays more because your life expectancy is lower.”

Quick on the draw

Since last year’s pension freedom reforms, growing numbers have shunned restrictive annuities in favour of income drawdown.

This involves leaving your pension pot invested in the hope of future growth if stock markets continue rising, while taking income as you need it.

Drawdown is popular because you remain in charge of your money but it also carries risks.

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Nearly 60 per cent of Britons do not shop around to find the best deal on the market

Stephen Lowe, director of retirement income provider Just Retirement, says annuities give you certainty while drawdown offers flexibility: “The value of your pension will rise and fall in line with the stock market, which will also affect the level of income you can take.”

You need to manage your fund carefully because it will suffer a double blow if stock markets fall and you draw income at the same time, he adds: “Those with larger pension pots or other assets can delay taking income until markets recover, but most will need a regular cash flow.”

In this case, there is a danger you will deplete your pot or even run out of money altogether.

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It’s best to use your state pension and annuity to cover everyday bills

You can get the best of both worlds by splitting your pension between an annuity and drawdown.

Lowe says: “Use your state pension and annuity to cover everyday bills such as food, council tax and utilities and be flexible with what’s left.”

Going down

Patrick Connolly, certified financial planner at Chase de Vere, fears that many people who have gone into drawdown are gambling with their future standard of living.

“With people living for 20 or 30 years after retirement, those who take out too much at first or whose investments perform badly could easily run out of money,” he warns.

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Drawdown is popular because you remain in charge of your money but it also carries risks

Connolly says you also need to beware charges when comparing drawdown plans: “You have to watch out for set-up fees and underlying investment fund fees, as well as charges for withdrawals, reinvesting income, transferring to another scheme, or even for receiving valuations through the post.”

Drawdown is a balancing act and difficult to get right. “Some take too much risk and make heavy losses, others play safe and watch inflation erode their pension income over time,” Connolly adds.

Review your investments and income levels every six months to make sure everything is on track and consider taking independent financial advice.